The global economy is facing a very precarious situation. The economic recession generated by the COVID-19 pandemic was followed by the war in Ukraine, slowing the recovery.
After a year 2020 marked by confinements and an economic recession which affected all the major economies of the world, with the exception of China, the post-COVID recovery is now in jeopardy, as the global economy comes under increasing strain.
The main factor holding back growth is galloping inflation, which breaks records almost all over the world. Even before the start of Russia’s invasion of Ukraine, prices were rising rapidly, as a result of the rapid increase in the value of raw materials, the imbalance between supply and demand, the crisis the supply chain and the monetary policies adopted by the various central banks to deal with the economic consequences of the pandemic.
But these tendencies were exacerbated by the war, which pushed up the prices of energy, raw materials, food and other commodities. And China’s zero-COVID lockdowns, which have created severe bottlenecks in the country’s main ports, including Shanghai, have caused delays and disrupted global supply chains, in which the Asian giant plays a part. prominent, which further increased inflation.
In the euro zone, inflation reached 8.1% in May, 0.7% more than in April, with the rise in energy prices reaching 39.2%. Meanwhile, in the United States, it reached 8.6%, the highest level since 1981, then in the midst of the oil crisis, with energy at 34.6%. In both economies, inflation stabilized around 2% in 2021.
As a result, what might initially appear as a “V” shaped recovery, that is to say fast and vigorous, and which was later considered to be a “U” shaped recovery, more gradual and slower , will now take an “L” shape, very slowwhile almost all economic agencies and central banks limit the prospects for economic growth.
The International Monetary Fund (IMF) continues to revise down its forecast for global economic growth, which it estimated in April at 3.6% for the years 2022 and 2023, i.e. 0.8% and 0.2% less than its January projections. Meanwhile, in May, the European Commission lowered its EU-27 GDP growth estimates to 2.7% in 2022 and 2.3% in 2023, from 4.0% and 2.8% in february.
Today, there are growing fears that the global economy is collapsing stagflationmeaning inflation without economic growth, although economic growth data remains positive in most global economies.
At the same time, this high inflation, with soaring energy and food prices, aggravated by the war, is increasing the risk of social unrestespecially in third world countries.
The Federal Reserve brings out the artillery
To combat high inflation, the Federal Reserve on Wednesday raised interest rates by 0.75% to between 1.5 and 1.75%, biggest increase in three decadeskicking off a tighter monetary policy from the US body, with another 0.50-0.75% hike likely at the central bank’s next meeting, according to its chairman, Jerome Powell .
In addition, the Fed is expected to raise interest rates to around 3.8% in 2023. With this measure, the Fed expects inflation to fall to 4.3% this year and 2 .7% in 2023, thus approaching its objective of 2%. But the side effect of rising interest rates could be a slowdown in economic growthor even a slide into recession.
Europe, lagging behind and at risk of fragmentation
The European Central Bank (ECB) has also announced its intention to let interest rates rise, which it will do in July and September, when the Euribor reached 1% and it is estimated that it could exceed 2.5% in 2023. The ECB, in turn, also affirmed its decision to no longer buy bonds on the market. Thus, like the Federal Reserve, the ECB would give up some economic growth in exchange for reducing inflation by any means at its disposal.
However, in the case of Europe, this announcement resulted in a sharp rise in the risk premiums of several of the most vulnerable economies of the euro zonelike Spain and Italy, threatening the latter with financial fragmentation.
Fearing a repeat of the 2012 crisis, which jeopardized the existence of the common currency, the ECB agreed to “provide flexibility” in the way it reinvests the maturities of the special pandemic program (PEPP) of 1,700 billion euros, which allows it to redirect its investments towards the countries whose debt is most stressed. At the same time, the central bank announced that it would start working on the creation of a new anti-fragmentation instrument.
Coordinator for the Americas: Jose Antonio Sierra.